 Trade, Risk, and Resilience in General EquilibriumNo 12797, CESifo Working Paper Series from CESifo Abstract: Sanctions, export controls, and friend-shoring shift the margin of trade policy from cost alone to exposure. When supplier risks are correlated, the value of a trade relationship cannot be evaluated in isolation; it depends on the sourcing network in which it is embedded. This paper develops a general-equilibrium theory of relationship-based trade under correlated risk. Countries allocate sourcing across partners whose risks load on common factors, while terms of trade clear markets and scale the uninsured covariance carried by each relationship. The mechanism separates individually optimal de-risking from collective resilience. Reallocation away from a risky supplier raises demand for substitutes; if capacity is scarce, or if substitutes load on the same systemic factor, equilibrium prices can erode, and even reverse, the risk reduction the reallocation was meant to achieve. The model yields a risk-augmented Viner decomposition into trade creation, terms-of-trade redistribution, and induced risk. Quantitatively, this induced-risk channel is small with broad re-sourcing and abundant substitutes, but first-order for critical inputs and high-loading supplier clusters. Keywords: geopolitical risk; friend-shoring; de-risking; supply chain resilience; trade networks; terms of trade (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12797 Access Statistics for this paper More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC. |
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